Hamish Wilson, CEO, writes….
The energy landscape is changing significantly and whilst the government has made it clear that it supports gas-generated electricity, all signs ultimately point to a move to a decarbonised electricity network, involving nuclear as well as renewables.
The UK government says it has spent heavily on the green agenda so let us consider two elements of this: Solar and Biomass. The initial Feed in Tariff subsidy regime was very generous and certainly stimulated, some would say over-stimulated, the industry. This attractive subsidy support created an industry of finance and installation companies that gave investors supernormal rates of return. This meant all ‘spare investment capital’ was moved into tax advantageous solar EIS schemes with 20% plus rates of return, guaranteed by the government. Undoubtedly the subsidy regime had to change and it has.
Similar financial returns resulted from the subsidy regime aimed at promoting low carbon heating – the Renewable Heat Incentive or RHI. This subsidy pays out on the basis of heat delivered, giving a perverse incentive to use as much heat as you can. A point spotted by the biomass industry. It’s easy to install a biomass boiler and get the subsidy for keeping a space, any space, as hot as possible – even if it is not required. Funded biomass projects generating super rates of return guaranteed by the government have further soaked up spare investment capital.
RHI support for heat pumps is set up with tight definitions as to which types of heat pumps are eligible for support (Air-source, ground-source and water-source heat pumps) with performance standards defined at set temperatures. What has emerged is a market flooded with Air-source Heat pumps meeting test performance conditions that bear no resemblance to operating in the field. Are parallels apparent between this and the recent VW car emissions scandal?
These tight definitions of eligible heat pumps, alongside standards set at temperatures independent of operating conditions has locked out new technologies and indirectly led to poor quality installations that seem to have set the market back.
The UK government insists it has a plan for carbon reduction and meeting our COP21 obligations. Maximising carbon reduction per unit spend is easy to say yet difficult to achieve without some courage in taking on vested interests. What is required is a strategic policy framework that can reinvigorate market confidence and create a platform for further low carbon growth. Currently we have a subsidy regime that locks out innovation and investors expecting government backed high returns for no technology risk. Given these entrenched positions created by subsidies, courageous government intervention is needed to change it. How do we get there?
I believe there are 4 ways to encourage innovation in low carbon energy.